Evaluating the Intentionality of Identified Misstatements: How Perspective Can Help Auditors in Distinguishing Errors from Fraud

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 16: Fraud

Abstract

According to Auditing Standard No. 14, fraud is an intentional act. Thus, when a misstatement is identified during the audit, auditors should consider whether the misstatement might have been caused intentionally (PCAOB 2010a). The objective of the present study is to investigate whether considering the perspective of the manager responsible for a misstatement’s occurrence impacts auditors’ beliefs concerning the misstatement’s intentionality. Using an experiment with 82 auditor participants at the manager level and above, I find that auditors who consider the manager’s perspective (e.g., thoughts, feelings, perceptions) assess the misstatement as more likely to be intentional when the circumstances surrounding it are indicative of high versus low fraud risk. Conversely, auditors who do not consider the manager’s perspective do not assess the misstatement’s intentionality any differently in the presence of high fraud risk versus low fraud risk information. These findings suggest that the ability to recognize when client circumstances suggest an increased risk that a misstatement was caused intentionally may depend on whether auditors consider the perspective of the manager responsible for the misstatement.

Author

• Erin L Hamilton, University of Nevada, Las Vegas